Question related to Project Selection - Oliver Lehmann Q 165
Submitted by hemald on Wed, 08/12/2015 - 02:06
Hello
Please help me by explaining why the below answer is correct.
165. Your organization has the choice between several internal projects it could run. In order to select projects, the organization assessed their strategic importance, investment requirements, and expected cash inflow from the projects’ products, services and results. What should the organization assess in addition?
1) The probability of changes to strategic goals.
2) The frequency of changes to strategic goals.
3) The assessments done should be sufficient.
4) The probability of the expected cash inflows.
Ans 4.
Please explain.
Thanks
Hemal
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Thu, 08/13/2015 - 09:13
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This is a typical question
This is a typical question which makes reference to Kerzner's book on project management. The answer is based on the principle that after you have done the analysis on how much cash will flow. If you can do probablity calculation on which of the cash flows is most likely , you can make the decision
Quoting below from Kerzners book -
Suppose you have a choice between two projects, both of which require the same initial investment, have identical net present values, and require the same yearly cash inflows to break even. If the cash inflow of the first investment has a probability of occurrence of 95% and that of the second investment is 70%, then risk analysis would indicate that the first investment is better.
Risk analysis refers to the chance that the selection of this project will prove to be unacceptable. In capital budgeting, risk analysis is almost entirely based upon how well we can predict cash inflows since the initial investment is usually known with some degree of certainty. The inflows, of course, are based upon sales projections, taxes, cost of raw materials, labor rates, and general economic conditions.